Commercial Real Estate Transactions

 

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Real Estate Commercial Transactions

Are you contemplating conducting any commercial real estate transactions? The process can be complex and overwhelming but don’t be discouraged. Investments in commercial real estate have many benefits.

The closing process for a commercial real estate deal is similar to closing residential transactions. The processes only differ in a few areas.

Author: Stan Faulkner, Founder, Perigon Legal Services, LLC

Mr. Faulkner is an experienced counselor and litigator with 15 years of experience, having held bar licenses in four states (Mo, Il, Ct and Ga). Stan Faulkner uses this experience and focuses his skills in the pursuit of assisting individuals in probate (trust and estate) matters, guardianships and conservatorships, estate planning, business disputes and contract disputes. Published on May 09, 2023.

Steps in a Commercial Real Estate Transaction

 

A commercial real estate transaction is a contract between two corporate enterprises rather than individuals. Commercial property is meant to be for business activities and not residential.

Generally, commercial properties are buildings used by businesses, but they can also refer to land used for profit-making or large residential properties rented to tenants. Restaurants, retail, hotels, resorts, office buildings, apartment complexes, and warehouses are all examples of commercial real estate.

Considering the complexity and processes involved, finalizing these transactions could take months. In commercial real estate, there are several processes involved in the process of closing the deal. Despite general patterns, the specific steps in each deal depend on the corporate organizations involved and the transaction details.

Below are the steps involved in a commercial real estate transaction.

Purchase Agreement

The purchase and sale agreement is the first step in a commercial real estate transaction. Both buyers and sellers must carefully review this agreement. Each term must be understood and its importance fully acknowledged.

It is prudent for each party to have competent legal counsel representing them during these transactions. The parties will, therefore, be able to understand their rights and responsibilities regarding the transaction, eliminating the possibility of legal disputes.

A purchase agreement also aids in the preparation of the preliminary title report and the creation of an escrow account. Consider hiring a real estate attorney in Atlanta if you’re shopping for commercial property in Atlanta.

 

Escrow Account

After that, the title and escrow company sets up and controls escrow accounts, which release funds from the buyer’s good faith deposit and/or assets once certain previously agreed conditions are met.

The use of escrow eliminates the worry of trust between the two parties. In escrow, the funds are held by a neutral third party, ensuring that no payment will take place until both parties agree.

The escrow system is also applicable in the purchase of a residential property. Nevertheless, commercial properties are subject to more stringent escrow requirements. Commercial property purchases require tighter and more detailed escrow controls in light of the higher sums of money involved and the complexity of the process.

Commercial properties often require funds from several sources, meaning greater due diligence is necessary to ensure a successful investment. The documentation is extensive and customized based on your specific transaction. 

 

Due Diligence Process

In a commercial real estate transaction, the purchase and sale agreement contains a schedule for the buyer to conduct due diligence on the property before purchasing. As such, the buyer or agent must inspect the property before moving on in the acquisition process.

This inspection usually entails evaluating the property’s physical condition, obtaining an environmental site assessment report to ensure no EPA violations exist, and other records such as utility bills and taxes. The due diligence phase ensures the property is in good condition before the purchase agreement is validated. Some of the common steps taken are:

  • Inquiring from the property manager on the maintenance and history of repairs carried out on the property
  • Inspection of tiles, light switches, and pipelines by a property inspector to ensure the property is in good working order
  • Engaging professional structural engineers to determine the building’s integrity and confirm there is no significant danger or structural issue with the building
  • Estimating the level of renovations required to achieve potential returns on the investment and the budget to finalize them
  • Reviewing the documentation to ensure no problem could result in a legal dispute
  • Conducting a property walk-through to ensure the property is suitable for the buyer’s intended use

If the inspection reveals additional expenses to fix issues with the property, the price may need to be renegotiated before investors invest more. The seller will have two options: to withdraw from the sale or to sweeten the deal and continue with the closing process.

Estate & business lawyers can be of great help in these situations.

 

Property Titles

Title insurance protects purchasers and sellers from losing out in real estate transactions due to an inaccuracy in the property’s title. This step reveals defects in the property title, which must be attended to before proceeding with the purchase. For example, old liens by the seller’s lender that aren’t removed from properties could prevent the investor from obtaining a clear title at closing.

A property’s chain of ownership is a significant issue arising in a commercial real estate transaction. Reviewing the line of ownership carefully before committing to a final purchase is essential. Any inconsistency in the ownership line should be corrected to prevent future legal disputes.

 

Books and Records

The financial documents, books, and property records must be reviewed as a condition of the purchase agreement. The relevant financial documents include tenants’ leases, rent records, loan documents, operating statements, balance sheets, and any work done on the property. The information would provide insight into the property’s financial and physical status.

 

Closing the Deal

Even though the closing is the shortest stage of the entire transaction process, it is one of the most sensitive. At this stage, the buyer’s and seller’s agents sign all closing documents, and funds are transferred via title and escrow companies. A closing also involves the transfer of keys, access codes, and important documents.

 

How does due diligence impact commercial real estate deals?

Due diligence in commercial real estate deals significantly impacts the success and smoothness of the transaction. It involves thorough market and submarket research, a critical underwriting stage, and ensuring all legal entities are correctly documented, such as in escrow agreements.

Unlike residential transactions, commercial deals require a deeper analysis of the property’s financial health, legal compliance, and potential profitability. This process helps identify any risks or issues before commercial real estate closings, ensuring that both buyers and sellers meet their obligations and protect their interests, making due diligence a crucial step in every commercial real estate deal.

Advantages of Commercial Real Estate

The following are some of the advantages of commercial real estate.

  • The earning potential of commercial rentals is the best reason to invest in them over residential rentals.

  • The landlord and tenant have more of a business-to-business relationship in these agreements, which helps keep interactions professional and courteous.

  • Commercial tenants and property owners have aligned interests, which improves the property owner’s investment value and allows it to be maintained and improved.

  • Commercial property prices are often easier to evaluate than residential ones since you can request the owner’s income statement and determine the price accordingly.

  • Using triple net leases, which comes in several variations, but the basic idea is you don’t have to pay property expenses. Real estate taxes, along with all other property expenses, are handled by the lessee. You will only have to pay your mortgage.

  • More flexibility in lease terms. Fewer laws govern commercial leases than residential leases, like security deposit limits and termination rules.

Disadvantages of Commercial Real Estate

 

Commercial real estate has many positive aspects but also negative ones to consider.

  • Commercial properties may require more time and effort since you have more to keep track of.

  • Maintaining your leases and caring for tenants might require hiring a licensed professional.

  • The cost of acquiring a commercial property is typically higher than that of acquiring a residential rental in the same area, so getting your foot in the door may be more difficult.

  • A property intended for commercial use attracts more visitors daily, so there is a greater risk of someone being injured or causing damage.

Tips for a Successful Commercial Real Estate Transaction

  1. Conduct thorough market analysis: Before investing in commercial real estate, it is crucial to conduct a comprehensive market analysis to understand the current state of the market and identify potential investment opportunities.
  2. Develop an investment thesis: An investment thesis is a statement that outlines your investment goals, strategies, and risk tolerance. It helps you stay focused on your objectives and make informed decisions.
  3. Choose the right submarket: Smaller submarkets can offer attractive investment opportunities within a larger market. Research the submarkets carefully and choose one that aligns with your investment thesis.
  4. Build a strong team: A successful commercial real estate transaction requires a strong team of professionals, including an attorney, broker, property inspector, and accountant.
  5. Conduct due diligence: As discussed earlier, conducting thorough due diligence is crucial to avoid unexpected expenses and legal disputes in the future.
  6. Stay organized: With the amount of documentation involved in a commercial real estate transaction, it is essential to stay organized and keep track of all the necessary documents and deadlines.
  7. Communicate effectively: Clear and timely communication between all parties involved in the transaction is key to a smooth closing process.

Call Perigon Legal Services for All Your Commercial Real Estate Needs

Commercial real estate transactions present significant challenges. You can navigate the legal requirements of commercial property investment with the help of a business lawyer in Atlanta.  

Get the help you need by contacting Perigon Legal Services today to speak with an experienced real estate dispute lawyer. 

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